Can you have a 401(k) and an IRA at the same time?

Saving for retirement can be confusing as there are so many types of retirement plans to choose from and a lot of rules to abide by. The most popular retirement plans are 401(K) plans and IRAs. If you are getting started with retirement savings, you might be wondering if you can have a 401(k) and an IRA at the same time. Yes, you can have an IRA and a 401(k) plan and you can make contributions to each account every year.

According to the Internal Revenue Service(IRS), you can have both a 401(K) and an IRA at the same time. That is you can open and contribute to a Traditional IRA and/or Roth IRA even if you have an employer-sponsored retirement account such as 401(K).

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Here is how you can contribute to an IRA and a 401(k) if you have both plans

Have a Roth IRA and a 401(k) at the same time and contribute up to $7,000 to your Roth IRA and $23,000 to your 401(k) in 2024.
Have a traditional IRA and a 401(k) at the same time and contribute up to $7,000 to your traditional IRA and $23,000 to your 401(k) in 2024.
You can also have a 401(k) and a Roth IRA together with a traditional IRA at the same time. If you have a Roth IRA and a traditional IRA, however, the total contribution to both accounts should not be more than the maximum allowed for an IRA. For example, you can contribute $3,000 to your Roth IRA and $4,000 to your traditional IRA since the total will not go over $7,000.

While you can have both an IRA and a 401(K) at the same time, your IRA contributions will still be tax-deductible based on your filing status, modified adjusted gross income (MAGI), or if your spouse participates in other retirement plans from work.

What is the difference between a 401(K), a Traditional IRA, and a Roth IRA?

Before we talk about the difference between 401(k) plans and IRAs, let’s talk about their similarities. All these three accounts are tax-advantaged retirement savings accounts. They are all designed to help you save money for retirement. It is important to note that a 401(K) is provided by employers whereas IRAs are opened by individuals themselves through a brokerage firm.

The main difference between a 401(K), Traditional IRA, and Roth IRA lies in when you pay taxes, how to open the account, and how much you can contribute to each account every year.

Both 401(K) and Traditional IRAs let you make contributions with Before-tax money, grow your accounts on a tax-deferred basis, and pay income tax on your contributions during retirement.
The Roth IRA, however, is the opposite. Contributions to your Roth IRA come from your after-tax money. With a Roth IRA, you get to grow your account tax-free and withdraw your money tax-free during retirement.

There is also a big difference between a 401(K) plan and IRA contribution limits. Contribution limits to 401(k) are higher than IRAs. For 2024, you can contribute up to $23,000 to your 401(k) or $30,500 if you are 50 and above. For IRAs, on the other hand, you can contribute up to $7,000 in 2024 or $8,000 if you are 50 and older.
401(k) are provided and sponsored by employers while IRAs can be opened from a bank and brokerage firms.

Benefits of having a 401(K) and IRA at the same time

Your 401(K) is great when it comes to reducing your taxable income and getting free money from your employer through contribution matching. Furthermore, your 401(K) comes with higher contribution limits compared to IRA accounts. This retirement account, however, has its drawbacks. Even if you avoid paying taxes now, you will still pay income tax on your distributions during retirement. On top of that, the investment options you can make with your 401(K) plan are limited compared to individual retirement accounts. Finally, 401(K) comes with higher administrative fees which eat up a lot of your profits.

What you can do to balance setbacks that come with 401(K) is to have a 401(K) and an IRA at the same time. Your IRAs come with tax advantages as well. In addition, you can avoid paying taxes by rolling over money from your 401(K) to an IRA instead of cashing out. IRAs also come with a wider range of investment options you can make with your savings which is essential in maximizing your earning potential.

Since you will pay income tax on your 401(k) distributions, having a Roth IRA together with a 401(k) can help you minimize tax liabilities during retirement.

Pros and cons of IRAs

An IRA is a retirement account that offers tax benefits on your contributions either upfront or during retirement. With a traditional IRA, you get to contribute before-tax money and pay tax on your withdrawals during retirement. With a Roth IRA, on the other hand, your contributions are not tax-deductible. That means you contribute after-tax money. Making contributions with after-tax money allows you to grow your retirement savings tax-free and withdraw your money tax-free.

Here are the pros and cons of IRAs.

Pros of IRAs	Cons of IRAs
IRAs come with a lot of tax benefits	There is a limit to how much you can contribute
IRAs are easy to set up	Early withdrawals trigger a 10% penalty for traditional IRA
A lot of investment options	May have a required minimum distribution(RMD) at the age of 73 in 2024
The money can be passed down to heirs tax-free(for Roth IRAs)	Contributions are lower compared to 401(k) plans
You might withdraw your funds tax-free	Income tax will apply to your traditional IRA withdrawals

Pros and cons of 401(k) plans

401(K) plans are popular among millions of consumers and you can open one through your employer. With a 401(k) plan, you make contributions with pre-tax wages, grow your account on a tax-deferred basis, and pay income tax on your distributions.

On top of these contributions, many employers match your contributions by a certain percentage. Some employers can match your contributions 100%. This makes 401(K) plans very attractive among employees.

Here are the pros and cons of a 401(k) plan.

You contribute before-tax money	Cons of a 401(k) plan
Your employer will give you free money through contribution-matching	Higher fees
It reduces your taxable income	Small matching percentages
Your employer might match your contributions	A higher income tax during retirement
Your contributions are higher than IRAs	There is a 10% penalty for early withdrawals
The plan is managed for you	Limited investment options

What is the age limit to open an IRA?

There is no age limit for opening an IRA (Traditional IRA or a Roth IRA). You can open an IRA and make contributions even if you are over 70½ old, According to the IRS.

What are the IRA contribution limits in 2024?

Although you can contribute to your IRAs, there is a limit to how much you can contribute. According to the Internal Revenue Service(IRS), the maximum contribution you can make to your IRA is $7,000 in 2024 and $6,500 in 2023. If you are 50 or older, you can contribute an extra $1,000 to catch up.

Are my Traditional IRA contributions tax-deductible?

Traditional IRA contributions may be tax deductible depending on your filing status, adjusted gross income, and other tax benefits from your employer. Please, check the traditional IRA income limits set by the IRS to know whether you qualify for a tax deduction on your traditional IRA contributions.

Are Roth IRA contributions tax-deductible?

Your Roth IRA is an individual retirement plan that allows you to contribute after-tax wages toward retirement savings. For this reason, the IRS does not allow deductions on the money you contribute to your Roth IRA. The benefit of a Roth IRA is that you grow your account tax-free and never pay taxes on your distributions.

Are 401k contributions tax-deductible?

Contributions to your pre-tax 401(k) are tax-deductible for the year you made those contributions. For 2024, you can contribute up to $23,000 and an extra catch-up contribution of $7,500 if you are 50 or older. This means that your 401(k) contributions reduce your taxable income by the amount you contributed.

For example, let’s assume that you are 55 and your salary is $60,000. If you maxed out your 401(k), your total contributions would be $30,500. When you are filing taxes, your taxable income will be $29,500. In other words, contributions to your 401(k) reduced your taxable income from $60,000 to $29,500.